Sunday, January 31, 2010

SUMMARY:- You know the market wants to correct when . . . - Good earnings surge NASDAQ, then it purges- GDP soars, but market yawns as the numbers behind the numbers are not as impressive . . . even as some pundits want you to believe.- Market correcting because it rallied far and needs to or it sees something nefarious down the road. Can you tell which?- Week packed with economic data, more earnings, and a market that has a lot of sellers.

Just needs to correct after a run or something wicked this way comes. Take your pick.

The market definitely wants to correct when there are strong earnings that are either ignored or a good initial gain is given up. MSFT posted outstanding earnings and gapped higher, but then it reversed on high volume. AMZN produced great earnings and gapped sharply higher, but then it reversed and gave it all up. Another sign of correction is selling after a strong economic report such as the GDP for Q4. That was the fastest growth in six years, and yet the market still sold. Initially, futures gapped higher and were holding their gains as the market opened and rallied. It did not hold up through the rest of the day, however. The market peaked, and the sellers came and sold off the market into the close on Friday. We expected short covering to come in, and it looked like it was doing so early in the session. There were good earnings and a good economic report. There was plenty to get the shorts scared and wanting to cover over the weekend, but even that was not enough to keep the sellers out of the market. They came back in and sold it despite those earnings and despite the good economic data. You know the market wants to sell when it ignores those two major areas that are the reasons why the markets rally.

Is the market ready to correct, or is there something more nefarious afoot? There has been a big run; the indices are up 70%. The March lows, where the SP500 bottoms, is a tremendous run up near 1200. It makes sense that there should be a correction, and one is underway. This is clearly a sharp pullback that is in a two-step process right now. Others have been one step down. There are two big legs both occurring at the end of the week. Selling off at the end of the week and down into the close on Friday is not necessarily a good sign, but there is still a lot of liquidity out there. After all, the Fed is still pumping out money. At the FOMC result this past week, it indicated that it will start taking the stimulus back, but it does not have a timetable for that. It has just started the talk about it, and that precedes actual actions by a few months. It looks like we will still have plenty of liquidity. The market looks many months down the road. It does not base long-term decisions on earnings this past quarter. We will see stocks gap higher or lower based on the past earnings and immediate outlook. As for the more sustained action several months down the road, the market prices that in over time rather than just on a day.

As seen on Friday, the economic data is still increasing. There was a good Chicago PMI, and the Michigan Sentiment was up. The GDP for Q4 the first iteration of it was very strong. There are other issues in the world, however. The EU is already heading back down. Germany is in trouble, and Greece is having issues selling its bonds without offering a lot of money. Spain and Portugal are under pressure, and Ireland is starting to turn up on the radar as a problem. S&P said that the UK was no longer the safest banking financial center on earth. Europe is starting to head back down. They had the same kind of stimulus as the US and are heading back down earlier than we are. They also started to recover faster than we did, but they may be going into a double dip and providing the US with a road map for the way down. We are essentially doing what they did, although their debt is not nearly as high as ours is.

This is a point to be very careful with worries of a double dip, yet the administration is talking about additional stimulus. This time it is talking about a small business stimulus, which may not help. It is based upon hiring, and it is very difficult to hire someone when you get just a credit. If you do not have the work for them and you get a one-time credit, then that does not offset the salary. The government is asking small business to get $5K off the taxes per employee, but you have to make up the rest of it out of your own pocket (and hopefully with profits). If there is not enough business in the first place that would require a business to hire someone, taking $5K off of a $15-50K salary is not going to induce them to bring that person on board if there is no work for them. The government is once again trying to tell you how to use your money very specifically instead of giving a credit and letting a business owner use it the way they see fit. How much can we rely on this being a potential move down ahead of a double dip? Not a lot at this point. The market rallied 70%, and it is down 7% right now. It is having a correction after a big run, and that is the most likely scenario. The path of least resistance has been down at this point. There is still room to correct and maintain a healthy overall gain. There are plenty of consolidation levels on SP500, NASDAQ, and other indices as well. It is jumping the gun to assume there will be a double dip and that the market is already pricing in a dive lower based on the action we saw the past two weeks. The economic data is still expanding and earnings are improving. Conspiracy theorists (and I have been called one on occasion) would tend to jump to that conclusion. I have my doubts about how strong this economy is, but the market is the market. It will do what it does and we have to watch it in order to position ourselves well. That is why we were taking gain off all the way up. We were buying new positions, but we were also taking a lot off the table and closing up positions as it started to sell. We are now are looking at downside positions. There could be real trouble out there, but no one knows at this point. The market is going to sell, we will make money as it goes down, and we will see how the leaders set up for a move back up. That will tell us a lot more than anything else will. That is when the leaders base out and get in good positions to rally once more.

OTHER MARKETS

The dollar was stronger, surging higher on Friday (1.3864 Euros versus 1.3970 Thursday). It was at roughly 1.42 just days ago. The greenback is surging after this test, continuing its relief bounce and coming up to critical resistance from the September 2008 peak, a low in December 2008, and then a range in the summer of 2009. There are lows and highs right at the 79.50 range it is trading at right now. A key week is coming ahead for the dollar, and it is likely to consolidate some more. We have had a strong move, a great test, and then another strong move. It could break up to 80 or even crack into the 81 area and then come back to consolidate. The dollar is very strong, and that is putting a damper on other sectors and other markets as well.

Oil closed down ($72.65, -1.20). It tried to consolidate near $75, but it has fallen down to the $72.50 level where there is support from August. It is trying to hold here. It bounced Wednesday and Thursday. It looked like it would bounce Friday because it was up a lot of the day, but then it turned over and closed at the lows. It may hold here, but it looks like it wants to sag down to 70. Oil is under pressure as the dollar continues to rally. They have an inverse relationship.

Gold, while it was somewhat down, was essentially flat again ($1,8180, -4.40). It is holding the December low and is still in play for a possible double bottom. That is just a pretty picture until it really makes a move that shows it is breaking higher from this support level. It keeps it interesting as we look ahead to see what the yellow will do and what the other markets might do in response.

Bonds rallied. As stocks were up originally on the GDP and earnings data, the 10 year was at 3.67%, up from 3.6 5% on Thursday. Then it reversed and closed at 3.60%. That is a hefty move in one session, and as bonds rally, yields fall. Concerns about the economy would send bonds higher. Why would bonds be rallying when the economy is supposedly recovering? It could be the lurking fear of a double dip or inflation, but one would think inflation would tear into bonds. There is something making investors nervous again and pushing bonds higher. Bonds did spike at the end of last year, but then they sold off and it looked like things were recovering. They are now marching back up and clearing an important interim peak. They are making a higher high again after the lower high. We have to keep our eye on bonds moving down the road.

TECHNICAL

INTERNALS

The advance/decline line was not too bad on Friday. NASDAQ saw -1.8:1, and that was better than the -2.5:1 on Thursday. The NYSE was a bit worse with -2.2:1 versus -2.6:1 on Thursday. It is still over 2:1 to the downside, which is more than we saw during the stagnation period. Things have started to move and the breadth ramped up.

Volume jumped again to over $3B shares on NASDAQ. That surge saw the biggest volume in months. The NYSE volume was up 41% to 1.58B shares. It was not the biggest volume in months, but it was big volume nonetheless. It occurred on the downside, and that showed distribution. That is high-volume selling where the institutions are dumping their shares they bought on the way up. If there is a lot of technical damage done, stocks will have to base out again before they can make substantiate moves higher.

CHARTS

SP500 had two big days down, three lateral, then two days down again. It was very heavy volume at the end of the week. Buyers are not rushing in to save the market, so the sellers are using the end of the week to dump shares. The SP500 closed roughly at the September peak, so it is still holding some support at this level. There is a significant layer of support from 1075 to 1050. It could come down to 1025 as well. There is a point in November, October, and then again a peak in August. There is a series of support levels that the SP500 could step its way down to. One of them is at 1025, and then down to 1000 where the 200 day EMA is lurking (but it is really more around 1112). There is no indication the selling is slowing with high volume on the downside. We will have to see where it lands. We were looking for a potential bounce back up to test the high, and it may still come. Trends do not like to give up easily. The S&P could come down to 1050, then rally back up, and try the level at 1100-1112. It could also go up to 1125-1130 before rolling back over. That is what makes these turns tricky. If it is a normal correction, it should bounce up and try to test. If there is something more insidious at work, it could dive straight down. The strength of the decline is indicative of the perceived problem in the market.

The NASDAQ is in the same situation. It tried to recapture 2200. It bounced up to that level on the high (2203), but it was unable to break back through the November and December peaks. It turned and made a new low on the selloff as it declined 1.5%. That puts it still in this range. There is a range of support running below 2100 and all the way down to 2040. There is a big range of consolidation as the market gave back many of the moves as it climbed higher. That is indicative of a momentum lag on the way up, but it gives it support points on the way down. As with SP500, it is still stepping lower with no indication of trying to slow down. I am looking at 2050 or 2000 as a pullback, and that is substantial. If it goes straight to that level, something bad is up. If it checks up in the general range of 2100-2150 and rebounds, then that is more in line with what has been seen before. Even if it fails, it would be more of a normal correction.

SP600 had a tough day, but it is not in as bad of shape as some of the others. It did break out of its lateral consolidation, as did the other indices on Thursday and Friday. It is holding at support at 20 and has a range down to 311-310. There is a lot of price congestion and a late August peak. There is a bit of head and shoulders action. Again, many of the same things the other indices are showing.

Semiconductors are struggling. They have given back most of their gain, knifing lower on Friday. It is in the middle of the range of consolidation from September into early December. There is support around 300 from an August peak, and then there are lows in September and one in early October. The 200 day EMA is coming up just over 300. It is the same as the others; it is selling hard, it will test some deeper support, and then we will see how it bounces and what kind of strength is there when it is done. The indices are in high-volume selloffs with the mutual funds dumping shares. It is a matter of how far they sell down on this move, and then how they bounce in response. Thus far, the bounces have been very anemic. We have not seen any type of big bounce just lateral shuffling that has been unable to bounce back and pick up any buyers to the upside. It is all downside right now, and we have to see where they bottom and how they bounce to tell what kind of correction the market will have.

LEADERSHIP

Technology. AAPL was down. It has broken through the 200 level and is at a key range at 190. There was a big chunk torn off there. It is one of the major leaders and a bellwether, and it is struggling. MSFT gapped higher and reversed; it had good results but got no respect. There is a weakening top with MACD, a lower high, and it broke down. There is a bear flag and it is tanking lower. I did not want to get in front of it and its earnings, but it turned out that would have been a good play. Even though it reported strong earnings, MSFT was swept back. CSCO had a same kind of action. It did not break down at hard and it has key support at 22 that could hold it up.

Restaurants are still doing well. PNRA is holding up nicely, and BWLD is also holding up well. Retail stores are struggling, however. WSM is back to the downside, and it made a stronger breakout of the lateral consolidation at 20. There was a lot of this: the selloff, the inability to bounce, then sliding laterally and breaking lower.

Energy. APA tried to consolidate laterally and is breaking lower as well. CVX did not announce great earnings, and it is down all the way to the 200 day EMA. That is at least holding for now. SLB is breaking down from its lateral consolidation attempt. CHK is selling off as well. None of these are ready to buy yet they need to do some consolidation.

Biotechnology. CELG is holding up well. It had a nice pullback to the 50 day EMA, and it could result in a play at some point. We took AMMD off the table to let it make its test. It is now coming back and could set up another buy in a few days. ISRG is still holding its gap. It was down on the session, but it is in good position and could yield a buy.

Industrials. TEX finally broke down. It tried to slide laterally, but it broke on a bit higher volume. It was not a major selloff, however. BUCY was an early leader, but it has given back that gain. It broke down into the range from 50-55. It will be critical to see if it will hold and base out. It is interesting that it never broke back up to 60 to make the right shoulder of a head and shoulder pattern.

Metals. FCX has sold off steadily. It is now down to the 200 day EMA at 65 where there is other price support. Other metals are down as well. Dollar-related "over there" stocks are in trouble and selling off as the dollar rises. Most other sectors are under pressure as well. There are pockets of strength as there always are, but there is a lot of pressure on the market overall. The distribution makes it difficult for stocks to find any footing right now, and that is why we are playing a lot of downside.

THE ECONOMY

First look at Q4 GDP ostensibly solid but you have to look at the numbers behind the numbers.

The Q4 GDP was the first iteration (there are three), so a lot of estimates were made with respect to what some of the numbers are. It gives a good idea of what is going on. It came in at 5.7% versus the 4.7% expected and 2.2% in Q3. That shows that we have technically emerged from the recession. There were two back-to-back quarters of positive GDP data. That is the headline number and it was the fastest since Q3 of 2003. I am not here to say that GDP was terrible. I am not enamored of the number for a number of reasons, but there are positives there. Consumer consumption was up 2%, and that was better than anticipated. It was expected to come in at 1-1.15% growth, so it was quite good. Consumers are buying, but the question is whether any of this is sustainable. The big boost to the number was inventories, adding 3.4%. If you take out inventories, then there is a 2.3% GDP. That is not bad, it is still positive. It is the second one in a row matching Q3, but that shows the driving force behind the improvement. Was it the kind of inventory growth that shows a lot of buying? Inventories went from -150B to -30B. That means that, while there is improvement, there is still just slower liquidation of inventories. They are not growing. It is like the housing market; it is not going down as fast as it used to. When the PMI numbers were negative, they were not going down as fast as they were before. They were improving, but were still bad. Did this make a lot of difference to the market on Friday? The futures were up ahead of the number, and they bounced modestly on the number and then gave back the gains. They were trading exactly where they were with slight gains after the number came out. It did not surprise the market that it was 1% better than expected. Indeed, the market was not very excited about it.

In talking with some economists, they said the consumer consumption that was up 2% was due to Cash for Clunkers and the first-time homebuyer credit. The question is whether there be that kind of consumption in the first quarter of 2010 without that stimulus. They are planning other stimulus, but it will be difficult to get that through Congress. We will have to see because people are weary of spending a lot of money. We spent hundreds of billions already with what some would call good results. There was a 5.7% GDP increase, but you have to look at where the increase was. I am not saying it is a bad number, but it is not as strong as it could be. For instance, many pundits were crowing that there was a 13.3% increase in PC equipment and software purchases in Q4. They said that showed signs of sustainability, but if you go back each of the years in the fourth quarter, there is a similar type of jump in consumption. This is not true for last year because no one was buying anything, but there was purchasing at the end of the year all the way back to the previous recession and our emergence from that. That is because there was an increase in credits and expensing for equipment and software. If you bought it, you have to take advantage of the expensing and the credit. When companies try to take full tax advantage, they make all the purchases in the fourth quarter, as late as possible, so it shows up and they can take it on their taxes that they pay in March or April. That is being smart with their money, and it happens every fourth quarter while we have had credits and accelerated expensing in place. It was no surprise that it went up because that was the time of year. What was surprising was there were pundits thinking this was a sign of renewed buying. They have said that every fourth quarter now since 2003. We have to step back and look at what is really going on. It was inventories, and it was the particular quarter with expensing and tax considerations that helped push this higher. I will not complain this is good. I hope it is sustainable, but we will have to see. The market did not do much after the number came out. Indeed, later on in the session, it turned over and completely sold off into a close on Friday. Historically, that is a bad thing for the market.

THE MARKET

MARKET SENTIMENT

The VIX posted a modest gain, but it was no huge surge given the size of losses, at least on NASDAQ. The rest of the NYSE indices posted nominal losses, such as SP500 with a 1% loss. Considering that stocks were down 2% on the indices just the other day, that was not much. The VIX jumped a bit. It was down early when the market rallied, but it is not where it was and has not taken out the peak from last week when it surged on Thursday and Friday's selling. This Thursday and Friday were pikers by comparison, and it is still at a relatively low range. It is testing and could break higher, but it was interesting that it did not explode higher on Thursday or Friday when there was significant selling underway.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 48.3%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, the highest level on this run. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. This is the lowest level of the entire rally and is at a bearish level. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -31.65 points (-1.45%) to close at 2147.35Volume: 3.093B (+10.61%)

Up Volume: 649.357M (+46.501M) Down Volume: 2.463B (+193.35M)

A/D and Hi/Lo: Decliners led 1.82 to 1Previous Session: Decliners led 2.5 to 1

There is a lot of data coming out next week, along with many more earnings. Earnings are not just a January event anymore. The first two weeks of February can be every bit as busy as the heart of January. There will be personal income and spending and the ISM. The Chicago PMI, which is usually a precursor, was up to 61.5. That topped expectations of 57.2 and beat the 58.7 in December. They were expecting an improvement in ISM, and it will be written higher before Monday.The other big news of the week will be the employment numbers. ADP is on Wednesday, and then initial claims will be out on Wednesday. Factory orders are important, but it will be the non-farm payrolls in the spotlight on Friday. That will take all of the interest, and they are expected to rise. That would make two out of three months of modest gains. When you couple that will improving data, many people will be saying we are out of the recession and home free. Maybe we will be, and I hope we are. That would be fantastic, but I do not know how strong the move will be. There are a lot of caveats based on the kind of spending we have taken out and the debt we have racked up. I am concerned with what the future holds, but I will enjoy what we are getting for now.

The market is engaged in an old-fashioned, butt-kicking selloff. There are big downside sessions where 1-2% is being lost to the downside. There has been a leg and somewhat of a pause (it is hard to call this a second leg), and then it is coming down further. It will continue to sell. It might be nervousness ahead of the jobs report, then there may be a bounce ahead of it. There are expectations of positive growth, and there will be nervousness that it could be better than expected. The shorts will want to cover. It is on Friday as well, so maybe we will get that covering at some point. For now, the market shows that the path of least resistance is still to the downside. There was no bounce to the upside when it tried to consolidate for three sessions and, indeed, fought as hard as it could to hold up before giving way. Consider the fact that it is giving way on good earnings reports and good economic data. That shows that this is a market that just wants to sell for whatever reason. We will see what positions hold. We have cleared off a lot and do not have many upside positions left. What we do have are at some kind of support or there is another reason, like we think they could hold this level. They may not. If this is an ugly selloff, it could give way and there could be no leaders left standing. We have also moved into several downside positions. We picked up more on Friday given that the selling was hard in the afternoon. There was a late bounce that allowed us to take some positions to the downside, but we took partial positions because we do not know what Monday will bring. I felt good enough about the way it was closing for the second week in a row to the downside on Friday to take some downside positions.

We will continue to look for downside positions, mindful of the fact that there may be an upside bounce at some point to test this. This could be an all-out, butt-kicking selloff that takes SP500 down to near 1000 in short order. Or it can hold in the range of 1050 and bounce back up and test the lows, and then come back down again. That is the more ordinary correction from going too far too fast. The other kind is that there is something bad out in the world that we are unsure of, and then it sells off hard without any rebound. You do get a rebound off that, but it does not come up anywhere near the old highs. It makes a lower high at a lower resistance point and turns back down. We will continue to look for downside. That is the play that seems to have the most in it, but there will be people who are looking to put some of the liquidity to work to the upside. There is still money out there, so there will be plays like CELG and some of the restaurants holding up in spite of the market selling. Right now, we do not put a ton of money to work on any one particular position, especially upside. We can put more to work downside because the market is showing which way it wants to go. There is no attempt to bounce, and it is selling off again, so we can be more aggressive to the downside. Remember, downside comes fast and it can leave fast. Move in, take your position, and take gain when it is there at least partial profits. If you get a bounce, then you will not be killed on it. Just exercise good stop-loss control, and as opportunities set up, you should take advantage of them. The market is selling on high volume, so you have to go with the flow. Many people do not like that, but it is the same as when it is going upside. You make your money and take it off the table when the play dissipates.

It has been a tough couple of weeks for the bulls. Again, we took a lot of money off the table on the way up. We made a lot of gain in the last several months on the way upside. We were light going into earnings, and that is the way you want to be . We are now seeing how earnings are shaking out and taking positions based on that. We will be looking for gaps to play both upside and downside because we love to play gaps off earnings. We will see how they hold, what sets up, and then take advantage of it. You should not get bent out of shape when the market sells just like you do not get bent out of shape when it rallies. Take what the market gives you and be smart about it. Have a great weekend and stay warm it will be a cold one for a lot of the nation.

Support and Resistance

NASDAQ: Closed at 2147.35Resistance:2155 is the March 2008 intraday low2167 from the July 2008 intraday low2168 is the September 2009, intraday peak2169 is the March 2008 closing low (double bottom)2177 is a low from March 20082191 is the October 2009 peak2205 is the November 2009 peak2210 (from September 2008) to 2212 (the July 2009 closing low)2218 is the August 2005 peakThe 50 day EMA at 22332245 from July 2008 through 2260 from late 2005. 2275 - 2278 from the February 2008 and April 2008 lows2292 is a low from January 20082319 from the September 2008 peak2326.28 is the January high2324-2370 is a range of resistance from early 20082382-2395 from 20082412-2415 represents a series of peaks and lows in 2007, 20082453 is the August 2008 peak

Support:2143 is the October 2009 range low2099 is the mid-September 2008 closing low2070 is the September 2008 intraday low2060 is the August peak2048 is the early October 2009 closing low

S&P 500: Closed at 1073.87Resistance:1078 is the October range low1084 to 1080 (September 2009 peak)1101 is the October high1106 is the September 2008 lowThe 50 day EMA at 11081114 is the November 2009 peak1119 is the early December intraday high1133 from a September 2008 intraday low1150 is the January 2010 peak1156 is the Sept 2008 low1185 from late September 20081200 from the July 2008 low

Support:1070 is the late September 2009 peak1044 is the October 2008 intraday highThe August peak at 1040The early October 2009 closing low at 1025The early August intraday peak at 1018The 200 day SMA at 1013The November 2008 peak at 1006 closing 1007.53 intraday992 is the August 2009 consolidation low

Dow: Closed at 10,067.33Resistance:10,120 is the October 2009 peak10,365 is the late September 2008 lowThe 50 day EMA at 10,36310,496 is the November 2009 high10,609 from the Mid-September 2008 interim low10,963 is the July 2008 low

Support:9918 is the September 2008 peak9855 is the early September peak in its lateral range9835 is the late September 2009 peak9654 is the November 2008 high9625 is the October 2008 closing high9620 is the August 2009 peak9430 is the early October lowThe 200 day SMA at 94279387 is the mid-October peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.